Summary Planning Cash Flow

Theme 2 Topic 8
Planning Cash-Flow
What is Cash Flow?
Cash Flow – the movement of cash into and out of the business over a period of time

Cash Flow Forecast – estimates of a firm’s expected cash inflows and outflows over a period of time

A Typical Format for a Cash Flow Forecast:

January February March
CASH INFLOW:
Cash Sales
Trade Credit Sales
Total Inflow

CASH OUTFLOW:
Wages
Other Costs
Total Outflow

Net Monthly Cash Flow
Opening Balance
Closing Balance

Net Cash Flow = Total Cash Inflow – Total Cash Outflow

Opening Balance = Closing Balance (previous month)

Closing Balance = Opening Balance + Net Monthly Cash Flow

Trade Credit – a period of time given by suppliers before customers have to pay for goods or services

Important!

 Cash flow forecasts record the cash at the exact time it is estimated to enter or leave the business
bank account or till
 If a number is in brackets it means it is a negative
 A cash flow forecast tells us nothing about profit – a profitable business can have poor cash flow and
still go out of business

Advantages of a Cash Flow Forecast

 Helps avoid unexpected cash flow problems – can plan ahead and act on it
 Supports loan applications – gives the bank more confidence that the entrepreneurs will be able to
make the repayments of the loan

Disadvantages of a Cash Flow Forecast

 It is only an estimate – sales may be lower than forecasted or costs may be higher
 The longer the period of time the cash flow has been calculated for, the less likely it is to be accurate
 Once a cash flow forecast has been prepared, it needs to be monitored regularly and updated
 In dynamic markets cash flow may be of limited use